Archive - Oct 5, 2012

It seems like it was only yesterday that crude plunged ahead of the first presidential debate as the escalation between Turkey and Syria hit a fever pitch, with Syria supposedly firing shell into Turkey and Turkey relatiating promptly, as it concurrently summoned NATO and demanded an Article 4 redress while passing a bill allowing its military to conduct cross-border operations in Syria, essentially giving itself a carte blanche to invade Syria without declaring outright war. Today, 48 hours later, Turkey may just get the opportunity to execute on this brand new law. Reuters reports that "the Turkish military returned fire after a mortar bomb fired from Syria landed in countryside in southern Turkey, the state-run Anatolian news agency reported the governor of Hatay province as saying on Friday. Turkish artillery bombarded Syrian military targets on Wednesday and Thursday in response to shelling by Syrian forces that killed five Turkish civilians further east along the border." Ignore that the official plotline said that Syria "apologized" for its offense, even as "an online video purporting to be from Jabhat al-Nusra, a jihadist group accused of ties to al-Qaeda, claimed responsibility."

The BOJ pioneered QE in March 2001, with two objectives. The first was to eliminate deflation, which took hold in the mid-1990s; and the second was to shore up Japan’s fragile financial system. Did it work? Yes, for the second objective - the BOJ arguably bought time for banks tied up in NPL disposal; but, unfortunately, QE was not successful in combating deflation. The BOJ’s intended policy transmission mechanism was so-called portfolio rebalancing. Ideally, the buildup in banks’ deposits at the BOJ that earned no return (but carried zero risk) should have prompted banks to seek higher returns (with higher risk) and thus increase their lending. But portfolio rebalancing did not kick in for several reasons; most of which are the same as are occurring in the US currently. More fundamentally, however, Japan's demographics hindered any hopes of a capex-driven recovery - and policy can do little to affect that. While the US faces a less dismal demographic picture, the Japanese experience highlights that other policies (as Bernanke himself admits) are required for any sustained benefit in the real economy.

Care to follow?

Goldman's equity strategist David Kostin has been very quiet for the past year, having not budged on his 2012 year end S&P target of 1250 since late 2011. Today, he finally released a revised forecast, one that curious still leaves the year end forecast unchanged at a level over 200 points lower in the S&P cash, and thus assuming a ~15% decline. The reason: the same fiscal cliff (which would otherwise deduct 5% in GDP growth) and debt ceiling debate we have warned will get the same market treatment as it did in August of 2011 when the only catalyst was a 15% S&P plunge and a downgrade of the US credit rating. However, one the fiscal situation is fixed, Kostin sees only upside, with a 6 month target of 1450 ("We raise our medium-term fair value estimates for the S&P 500 in response to openended quantitative easing (QE) announced by the Fed."), and a year end S&P target of 1575, calculated by applying a 13.9 multiple to the firm's EPS forecast of 114. Of course, this being bizarro Goldman Sachs it means expect a continued surge into year end, then prolonged fizzle into the new year. Why? Because there is not a snowball's chance in hell the consolidated S&P earnings can grow at this rate, especially not if the Fiscal Cliff compromise is one that does take away more than 1% of GDP thus offsetting all the "benefit" from QE. Simply said, companies who have already eliminated all the fat, and most of the muscle, and are desperate for revenue growth to generate incremental EPS increase, have not invested in CapEx at nearly the rate needed to maintain revenue growth, having dumped all the cash instead in such short-sighted initiatives as dividends and buybacks. Also, recalling that revenues are now outright declining on a year over year basis, and one can see why anyone assuming a 14% increase in earnings in one year, is merely doing all they can to make the work of their flow desk easier.

Which do you think costs more to subsidize, TBTF Wall Street or Sesame Street?

What can be said? Rinse, repeat, rinse, repeat.

Everyone basking into the market truce provided by Super Mario. And taking some easy time off… 

Friday afternoon Periphery squeeze barn stomp

AAPL is down 1.5% and once again testing its 50DMA. Now trading the range of Tuesday's closing ramp-fest and below its closing VWAP... BTFD?

Italy's FTSEMIB is up 5% this week, Spain's IBEX +3%, Portuguese government bond spreads are 82bps lower, and EURUSD is 1.25% higher this week - all biggest bull moves in 6 weeks. It would appear that all is well and Europe is saved - who knew? Credit markets are running tighter in a hurry with subordinated financials and XOver leading the way (as uber-high-beta bets are on) and all European financial and corporate credit indices at post-roll tights (lowest risk in 3 weeks). FYI - European bank senior and subordinated credit risk is now at its lowest in a year - and almost 40% lower than its post-LTRO (remember the encumbrance and deposit outflows) highs. EURUSD is close to multi-year highs relative to swap-spreads - but Europe is fixed so that's ok (especially with Merkel popping over to Athens?). One last thing - the majority of all this strength occurred today.

80% of the people who contribute to SS get less than what they paid in.

Several weeks ago, the platinum producing company that started it all (after police killed 34 of its striking workers at its Marikana South African mine) Lonmin, conceded and agreed to a 22% wage hike. In doing so it once again proved that in game theory he who defects first, defects best. Shortly thereafter the strike spread to all other South African mining industries, and has even spilled over into the trucking industry, whose ongoing strike has crippled the country and threatens to paralyze all commerce. The only reason for the continued worker boldness: Lonmin folding to worker demands, in the process empowering all other workers in the African country to demand equitable treatment. Which is why today's news that that "other" platinum miner in South Africa has decided to go the opposite route, and instead of yielding to worker demands for a raise, has gone and fired 12,000 workers taking part in a three-week strike. How this dramatic shift in the balance of power affects the already struggling country, and its mining sector remains to be seen. However, if recent events are any indication, he doubt local workers will just put down their banners and go back to work as per the old status quo. In the meantime, look for ever less platinum,and gold, to be produced by this mining powerhouse.

It appears social unrest is resurgent on the streets of Bahrain once again.  Following the funeral procession earlier in the week (of a young boy who died in earlier street battles with police), protesters are once again gathering and marching to the Pearl Roundabout. Police are active with tear gas and fires are breaking out... via Twitter: #Bahrain is in chaos.

As a job-safe Big Bird might have said "one of these things is not like the other" as we look at the performance difference between financials and industrials in the new normal. While short-term newsflow keeps banks to'ing-and-fro'ing, the inevitable truth is that it appears it is different this time - and not in a good way.

The fact-digging continues, this time out out of Goldman, which has some less than stellar words about what the superficial consensus says was a strong number. Then again, Goldman's agenda is pure goldilocks: an economy that is not too strong and just right for another $2 trillion of QEternity at a minimum. Remember: if jobs were to really surge someone might ask Bernanke if when he will stop his $85 billion/month flow program aka QE3.

The Greeks only assume the mantle of serfdom to keep the pipeline of capital flowing. They have damaged their national psyche in the process and caused undue pain for their citizens but it must seem simpler, to the elite of Greece, to beg rather than go back to work. The problem for Europe now is that the amount of money is so large and the pain will be so great that they wince at the consequences of their misbegotten strategy. Europe provided money, demanded austerity, and kept the charade in play far longer than good sense would dictate. Now, however, I would assert; the tragedy is about to end and the farce about to begin.